Competing with pirated versions of its own software is hard for Microsoft, Steve Ballmer said at a Strategic Update meeting with analysts in New York last week. "Windows license, number one market share. Number two market share goes to Windows pirated, or unlicensed. That's a competitor that's tough to beat, they've got a good price and a heck of a product, but we're working on it."

Microsoft pursues pirates with some vigor, spending time, money and energy trying to reduce their market share. But it's a fight it knows it can never win, and one that doesn't have a huge impact on its business anyway. Sure, some of the pirated software represents lost sales, but many unlicensed users  especially in developing countries  would most likely switch to open source software if the only alternative was having to pay for Microsoft's wares. As Ballmer clearly understands, demand is bound to be artificially high when the price of pirated software is zero.

Microsoft sees Linux as a much more significant competitor, even though its share of the desktop OS market is small. Here's why: "I think the dynamic with Linux is changing somewhat," Ballmer said at the meeting. "I assume we're going to see Android-based, Linux-based laptops, in addition to phones. We'll see Google more as a competitor in the desktop operating system business than we ever have before."

This statement is quite revealing in that it shows Microsoft's general fear that Google is out to get it is becoming more concrete: that Google is going to try to use Linux to do much more significant damage to Microsoft's businesses than it has managed to do so far. As yet its Chrome browser (a platform for future web services?) and its cloud-based applications such as Gmail, Google Calendar and Google Docs, which compete (in a mild way) with Outlook and Office have had almost no impact on Microsoft. But Google taking a lead with Android Linux could make a far bigger impact on the desktop than any of the more traditional Linux players have been able to so far.

Microsoft is also worried about Linux because of its success in the data center, where its share of the server market, at a little below 20 percent, is significant. It's these worries that prompted Microsoft to warn anyone who cared to listen that Linux infringed its intellectual property and to mutter darkly about legal repercussions. Last week these mutterings turned into a lawsuit launched against TomTom, alleging patent violation relating to the company's implementation of the Linux kernel.

These same worries were behind Microsoft cozying up to Novell, giving it hundreds of millions of dollars in exchange for support certificates it can give or sell to customers who use Novell's SUSE Linux, to help it fight Red Hat. It's a kind of 'divide and conquer' strategy on the server side of the business, though it doesn't seem to be working very well: Despite the help from Microsoft, Novell's Linux business was down 42 percent in the first fiscal quarter of this year (ending January 31st.) By contrast, at the end of December, Red Hat reported revenue up 22 percent in its third quarter.

Microsoft's only other competitor on the desktop is Apple. "I think depending on how you look at it, Apple has probably increased its market share over the last year or so by a point or more, said Ballmer. "And a point of market share on a number that's about 300 million is interesting. It's an interesting amount of market share, while not necessarily being as dramatic as people would think ..."

Which is a polite way of saying that in Microsoft's opinion Apple is not really a competitor worth worrying about. Its desktop market share is beginning to fall back after a strong couple of years, and with no presence in the server room it doesn't pose a threat in the way that Linux does. Basically, Microsoft is saying it intends to ignore Apple like a wasp at a picnic, and with any luck it will eventually buzz off.

It's a message that appears to come from the very top of the company, but one that does have unfortunate consequences: Apple's consumer goodies are forbidden fruit for the Gates clan, Bill's wife Melinda told Vogue magazine recently. "There are very few things that are on the banned list in our household. But iPods and iPhones are two things we don't get for our kids ... Every now and then I look at my friends and say, 'Ooh, I wouldn't mind having that iPhone,'" she laments.